Trading Expectations

As we all know, when we open a trade, we look forward to it being a winner. Given the win rate of a certain trading strategy, there is a random distribution between wins and losses. However, we trade to make money with a proven strategy. The Profit Room’s strategy allows you to be confident when you place a trade. So we don’t “panic close” the trade when the market goes against us, or exit too soon when we are in profit.

If you know the expectancy of your trading strategy, you will be able to deal with these situations better. There is a psychological aspect here: knowing the predictable profitability of a larger number of trades you undertake will build your confidence, which in turn reduces your tendency to shortcut winners and to let losers run too long. Having this confidence will thereby improve your overall results.

How to determine the expectancy of your trading system? Assuming you keep records of your trades, you should go back and look at all your trades that were profitable versus all your losing trades. Do this over a period of at least 3 months and at least 100 trades. The more data you can use, the more accurate the result. We only need 4 pieces of information: number of winning trades, number of losing trades, amount of money won and amount of money lost. From this data we can calculate the following:

Net profit = amount of money won – amount of money lost

Win rate = number of winning trades / total number of trades

Lose rate = 1 – win rate

Average winner = amount of money won / total number of winners

Average loser = amount of money lost / total number of losers

Average reward / risk = average winner / average loser

Expectancy per trade = win rate x average winner – lose rate x average loser

Or, alternatively, expectancy per trade = net profit / total # trades

Expectancy per month (profit forecast) = expectancy per trade x average # trades per month

Expectancy per amount of money risked = win rate x (average reward / risk + 1) – 1

Or, alternatively, expectancy per amount of money risked = net profit / average loser / total # trades

We hope this information helps you in determining your expectancy rate of trading.

The Profit Room 

Short-term vs. Long-term stock investment

There are many persons that run towards stock investment as a means to make some quick money. This is perhaps however not the best investment option for persons with short term rewards in mind. The best option when thinking of investing in stocks is if you are interested in accumulating funds over a long period of time. One such example is the investment for future needs such as a nest egg for retirement and so on.

In stock investment both short term and long term investments come with risks attached and therefore nothing is truly guaranteed in the stock market. Today could be very good and tomorrow very bad resulting in great gains or great losses as the case may be. However, in terms of long term investment, it is shown according to statistics that there are no 20 year portfolios that have lost on the stock market. The average returns have averaged about 10 percent and these accounts all have a broadly diversified portfolio of stocks.

In the short term the market is very risky. The market will go up and then go down so if you are only thinking of investing for a short period then this is not the best option. If you are nearing retirement age and now beginning to invest in stocks this is not a good option. The best option in these cases as a protection against inflation, rather than stocks, is to invest in stable investments such as bonds and other cash instruments. This offers more security than stocks in the short term.

So how long is considered short term? Many persons are under the misconception that short term means less than a year but this is in fact not so. In terms of stocks short term is considered to be five years or less and some persons will recommend more years rather than the minimum of five years. A good rule is that if you are going to need your funds in the next five years then stay away from stock investment. Another point to note is that unless you are an active trader then short term investments make no sense. If the funds being used are for retirement investment then being an active trader is also not recommended.

The average down time for some markets is a year but this has been seen to last much longer a well so though for a long term investor this downtime may seen to be a lifetime it will pass but if you are a short term investor you will lose a lot depending on the market fluctuations. Stock investment will offer many great opportunities but can be devastating for a short term investor. If you know that the funds you are investing will be required for use in a short time then choose investment options that are more secure and protected. It is true that you may get lucky and make a fortune but it is also true that the risks are high and that you can lose everything.

The Profit Room